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Over the last few weeks, I’ve noticed a trend in the recent Hivergent posts. We’ve been critical of mega-ICOs that looked to raise too much money, we’ve argued that the blockchain market is about to enter a multi-year crash and we’ve generally been very pessimistic about many new blockchain projects.

In short, a new reader might believe that I’m a cynic blockchain technology. On some level, they might be right. I’ve spent a lot of time criticizing the industry and not much time at all on what really matters… where the industry is going.

Today, I’d like to dedicate this post to the inevitable good we believe blockchain will bring to the world and shine a light on the things that ultimately matter.

Blockchain is about True Ownership

For years, we have accepted that when you give someone your information, someone besides you had the ability to change that information as they see fit. Google, Facebook, Amazon, Walmart, Chase, Bank of America and many more have root access to your private information. This was the price of doing business with the old technology.

Blockchain has fundamentally changed that assumption. With the launch of Bitcoin, it become possible for a team of software engineers to architect, design, deploy and maintain a piece of software without ever gaining control of their user’s data. The only people who could touch that information was the user and the user alone.

This is and will be the groundbreaking paradigm shift of the next software generation. It started with a cryptocurrency on a decentralized ledger, but as the technology matures, more and more applications will begin to build with this philosophy in mind and change the relationship with our software providers.

There are Many Great People Working in Blockchain

If you get most of your news about blockchain online through sources like Reddit, Twitter or even coindesk, chances are you have a jaded view of the people in the blockchain space. I know in my experience online I’ve had many, many poor interactions with people. I can leave you feeling like the only people that matter are ones who have hyper inflated egos and only care about price.

However, when you get a chance to step into the real world and meet the people working in blockchain, you get a very different view. The people actually making a difference in this space are very humble, are incredibly aware of the risks and downfalls that are available and are ultimately working for good. It’s one thing to posture on your social media page about which coin you think is going to pump that day, very different to meet someone who’s given their career to this nascent field and are exposed to downside.

If you’re jaded from the online interactions, I found that just reaching out to knowledgeable people via email or private message can lead to a better experience. When you’re in the hivemind of reddit, it’s easy to get overwhelmed. But individuals often are much kinder and way more given than you would expect.

The Best is Yet To Come

Back in the mid-90’s, some people became aware of the massive effect the internet was going to have on the world. Some people dedicated their whole careers to making great internet based products (back when calling it ‘the world wide web’ was cool). However, we fail to forget that back then, cutting edge websites looked like this:

When the internet was being hyped and built in the 90’s, it was ugly… not nearly as useful in a world with smart phones and a whole market of qualified developers with years of experience building web applications. It was only after years of refinement that the web became what it is today, to the point where I’m able to use my browser as my word processes, publisher and communication medium.

Blockchain today is that same ugly duckling that the internet was years ago. It’s not easy to develop for and is most certainly overhyped for the value it can provide today. But given the time, care and love it deserves, we can turn it into something revolutionary.

That is what we believe about blockhain and it’s community. We will criticizen where we see a need for improvement, but make no mistake. Hivergent is 100% behind making great blockchain organizations and making a better community.

In this post, I’m going to be talking about how my understanding of the blockchain ecosystem evolved over the last few years.

“The Flippening” of Bitcoin to Ethereum

When I first began investing and learning about blockchain, I was very attracted to Ethereum. It was technology platform that made a great deal of sense to me, as it lended itself nicely to network effects (not unlike Microsoft Windows or the Apple iPhone ecosystem). Because of my fascination with this blockchain, it only seemed logical that Ethereum would rise to become the #1 blockchain by valuation.

My thought process went as such:

Blockchain technology is going to be a major influential technology.

Blockchain technology lend itself very heavily to network effects, meaning this is likely a winner-take-all ecosystem.

Ethereum can do everything that Bitcoin can do and more.

Therefore, Ethereum is going to maintain the most value.

Over the next year, Ethereum rose dramatically in value, much faster than Bitcoin or any other competitor during that time. In addition, Ethereum was adding new projects and platforms to support the the underlying platform (this was before even the ICO’s built on Ethereum began to take off.

I was a proponent, I would later find out, about a popular theory called ‘The Flippening’. This theory has a very zero sum view of blockchain valuation, ie, that if Ethereum is to rise, then Bitcoin must fall. I believed in the theory so staunchly that I knew that Bitcoin could not sustain its value. Eventually their investors would support another major blockchain (like Ethereum).

Why ‘The Flippening’ Didn’t Work

However, as 2017 progressed and we got to see how the market reacted to Bitcoin, Ethereum and every other blockchain was valued, the Flippening never materialized. Despite the massive valuation gains by the whole ecosystem and the new technologies, Bitcoin was doing better than ever, maybe even stronger than before!

This made me realize that I had been wrong about Bitcoin, Ethereum and the markets that each of these blockchains were competing in. “The Flippening” was a good theory, but one that did not stand up to the facts surrounding the market. Each blockchain’s value is supported by a set of value drivers that are hard to replicate and hard to take away. What I learned was that the value drivers behind Bitcoin may be the strongest in the ecosystem.

What Makes Bitcoin Resistant Against “The Flippening”?

Here’s a short list of the value drivers that make Bitcoin so strong.

Bitcoin is the most supported cryptocurrency in fiat-to-cruptocurrency exchanges.

After new investors and users begin holding any digital asset, it is a trivial process to exchange those tokens for another digital token. Eric Voorhees’ Shapeshift.io and services like Kraken and Poloniex made this process very easy.

However, most of the world still does not own cryptocurrency. Instead, they hold fiat currencies, like the Dollar, Yen, Pound, Euro, etc. These do not exist on any blockchains (yet!) and cannot easily be convert to cryptocurrency. Instead, the easiest way to convert from fiat to cryptocurrency is to go to an exchange like CoinBase.

This is where Bitcoin’s primary competitive advantage comes from today. Most major exchanges will only support a few fiat-to-cryptocurrency market pairs and of those, fiat-to-BTC is always available. Even if the exchange supports one or two others, BTC gets preferential placement on the exchange website by being the first listed and promoted.

When new traders enter the market to purchase cryptocurrency, BTC is displayed as the default. So naturally, just by being the most prevalent, people will purchase Bitcoin over other cryptocurrencies. Even if the trader’s purpose is to purchase an alt-currency like Monero, Dash or Litecoin, they will have to go through an intermediary token. BTC becomes the default transition token in these cases.

Bitcoin has the largest brand recognition world wide in the blockchain space.

From an internet search perspective, Bitcoin is by far the most searched term. Bitcoin is searched on Google more than “Ethereum”, “Cryptocurrency” and “blockchain” combined, despite the growth in people’s understanding of these particular terms.

This also translates to the real-world in my day to day dealings with new people in this space. I can’t tell you how many times I have told people that I work with blockchain to only get blank stares in return. After I clarify with a statement like “have you ever heard of Bitcoin?”, they understand what I’m talking about.

To most people, Bitcoin is the Cryptocurrency market. It does not matter how innovative or advanced other blockchains are, because the only one they have any working knowledge of is Bitcoin. When they enter the industry, they are most comfortable with the Bitcoin blockchain and, if so inclined, eventually learn about the others. But Bitcoin is the default.

Strong Community Support

And then we cannot overstate the support from the various community members in the Bitcoin ecosystem. Bitcoin has a diverse set of miners, developers and community members who feverishly support the technology.

Just to list a few statistics here:

The Bitcoin Core project always has at least a dozen active contributors outside of the Bitcoin Core team, making improvements to the project

Reddit’s r/Bitcoin has over 250,000 subscribers, 2.5x more than r/Cryptocurrency and r/Ethereum.

BTC is heavily invested and supported by the community, and has been growing for almost a decade. This sort of support is not built easily and does not go away easily.

Conclusion

Bitcoin is likely going to be the highest valued blockchain for this generation. Things can always change, but Bitcoin has an important role in the blockchain community and will not easily be overtaken by newer blockchains.

As the next generation of blockchain applications start to be developed, including the various payment channels (Lightning, Raiden, etc) and applications built on top of blockchain networks (prediction markets, on chain exchanges, etc), there will be disruption to the ecosystem. However, until the next set of breakthroughs comes to disrupt the market, Bitcoin is here to stay.

In the last few weeks, the main cryptocurrency news source I read, TrustNodes, had no less than eight articles about daily price movements in BTC and ETH. If you go onto forum boards or messaging channels, most of the discussion is on the price, and how they’ve moved since yesterday (maybe last week if we’re doing an investigative piece).

If this was your main source of ‘news’ in the cryptocurrency world, you would very likely have a skewed vision of what matters and what does not. Many traders and readers get tunneled visioned on very trivial data with no context to overall market movements and fundamentals. It makes the world very hard to understand and very easy to get blindsided by large scale events.

But when you slow down, step away from the troll box and look where your news sources are not looking, you start to get some insight. There is a chaos in the minutia that begins to dissipate when you zoom out and look at the big picture.

Today, I want to talk about one of those big picture phenomenons that are affecting the price of every cryptocurrency you know. Here are three major surges and price crashes and the lessons we can take away from them.

Dot Com Bubble

Source: Wall Street Journal

The Dot Com Bubble started with the widespread adoption of the internet (I’m sure you’ve heard of it). Because most Dot Com companies launched on the NASDAQ, the price of NASDAQ as a whole became a good picture of what was happening in the internet website market.

As this very well illustrated graph from the WSJ show, the money invest, and therefore the price of these Dot Com companies grew quickly through 1998, then faster by 1999, then shot up over 2000 points in a little over three months to an ATH of 500 points. Then the price made its first crash, stabilizing briefly at 4,000 points, then eventually crashing and hitting a floor of just over 1,000 points.

That’s the part you may likely be aware of, but there’s more to the story. From the very peak of the market at 5000 to the bear market low of a little over 1,000, the time elapsed during the ‘crash’ took 31 months to complete. Moreover, the market did not return to it’s ATH of 5000 until August 2016, or 16 years after the Dot Com Bubble began it’s downfall.

US Housing Price Crash

Source: FRED

In 2008, the world went through one of the worst financial crisis’ of our time. The details about how such an event was able to occur is a fascinating story that we won’t dive into in this paper. What is relevant is that we can track how the price of homes, the primary ‘asset affecting the financial crisis, moved before, during and after the market crash.

From the early 90’s through about 2000, the average house price in the US grew slowly, increasing at a steady rate. However, this rate of growth continued, moving the average home price up faster and faster. This was largely fueled by shady financial vehicles and lowered standards for home buyers, but again, details not needing to go into here.

The market hit a crest in 2008, where the price peaked and then began its quick descent to a new price floor, dropping by roughly 25% by the year 2012. According to this particular index (there are other similar indexes that track numbers in a slightly different manner), the market did not reach its pre crash high until the year 2016, or almost 8 years after the initial crash. The time from peak to valley was roughly four years.

Bitcoin Bubble

In May of 2013, the market capitalization of Bitcoin was stable at about $1 billion. There were some minor peaks and valleys, but the price of the asset stayed relatively until the end of the year. During this time, Bitcoin took center stage after a series of high profile events, cap stoned by the congressional ‘lovefest’, where sitting congress people praised Bitcoin’s ingenuity.

During this time, Bitcoin hit an ATH over $1,100, bringing the market capitalization to almost $12 billion dollars. Over the next few years, the price of Bitcoin collapsed and hit a low of about $200 before re climbing during the last year to an All Time High of almost $3,000.

While this has been great for cryptocurrency, the time frame of when these events happened and how long it took to both crash and recover are often lost. Bitcoin first hit an all time high in early December of 2013. The cryptocurrency hit a post market low of less than $200 in January of 2015, over one year later. He’s the amazing part: Bitcoin did not raise above $500 until May of 2016 and did not surprise it’s previous ATH until January of 2017, a full three years after it’s old peak.

What Does This Mean For the Cryptocurrency Market Today?

No two bubbles act quite alike. The Housing Bubble and Bitcoin recovered within a decade of one another, while the Nasdaq took almost two decades to reach it’s old ATH. Some crashed faster than other and recovered quicker, and each had their own size.

However one thing that does become apparent through all of these crashes is this: when a crash takes place, it does not take weeks or months to recover, but takes years to return to their previous highs. There are almost no examples of markets rising as fast as these markets and then sustaining or even growing beyond that. Markets and people do not act like that.

Here is the cryptocurrency market today:

And here is the cryptocurrency market without Bitcoin:

Even if this market reacts like Bitcoin and recovers just as quickly, we may not expect to see $+60 billion altcoin market valuation again until the year 2020 and may not even hit a price floor until 2018. If it responds like the Nasdaq, then we’re talking about the late-2020’s until the price recovers.

If this were the case, how would you choose to respond? Would you be worried about the price of Ethereum or Ripple or any other cryptocurrency on a day to day basis? Or would you rather pour your time and energy into something of more substance?

This is far from the last cryptocurrency crash our market has seen, and if the last two are any indication of where we’re going next (2013 -> $12 Billion, 2017 -> +$120 Billion), we’re likely going to see bigger highs and vaster lows.

Recently, a Venture Capitalist named Stefano Bernardi took a closer look at the Filecoin ICO, an impressive looking project from Juan Benet of Protocol Labs. He and his team built a decentralized protocol that is going to act as a replacement to HTTP, making file storage faster, cheaper and quicker. You can research more about the project here.

Filecoin was designed to take advantage of this protocol and create decentralized storage for the masses. Stefano was excited for the project and decided to look into the how much the team was looking to raise.

After reviewing the fundraising structure, Stefano was quite shocked at what he found. This article just came out a few days ago and the terms have neither been confirmed nor denied by the Protocol Labs, but he found that Filecoin was positioned to raise $300 million and up to $1.3 Billion.

You can read the article and review the flaws or concerns with this analysis here. While Stefano focused on the actual amount being raised, I am going to focus on Protocol Lab’s justification of said amount and give my own reasoning why >$100 million is being raised (spoiler: it’s more than greed).

Funding Argument #1: Filecoin is Ambitious and Needs The Capital

What benefit does a potential capital raising of >$100M bring to project development, especially when tokens are already retained by the team?

This seems like a reasonable question, given that $100 million is usually given to organizations that have (A) created a product, (B) launched it to the market and (C) have shown significant market growth. This team has shown they can create a product (or at least an alpha for a project), but have yet to show significant growth.

Highlight from Protocol Lab’s response:

But let me be very clear here: it will dramatically increase our odds of success to have significant amounts of capital backing us. We need to recruit excellent teams of people; we need to fund the development of dozens of software tools, products, and services; and we need to invest deeply in forming a strong ecosystem, so that we get strong allies making Filecoin great.

On some level, this is true, as one of the cardinal sins of building a startup is underestimating the amount of capital you need an running out of runway. The flaw in this logic is that they feel that in order to be successful, they need to raise at least $100 million, or over five times what the Ethereum ICO brought in back in 2014. Remember, Protocol Labs can raise whatever amount they desire, and they chose a structure that will conservatively raise >$100 million.

This reasoning would make much more sense if they were a closed system and had to build most of this software themselves. But Filecoin is an open source project and expects to have help from the community. The better way to phrase their statement is that they need to influence the development of dozens of tools, products and services, not build it themselves.

When building an open source product, part of the work is done by community contributors and development teams building their own software on the platform. In Ethereum’s case, most ‘Ethereum’ projects were not organized by the founders, but as a result of the work the Ethereum project did to build their platform. Filecoin, if successful, will be no different.

But what about companies like Uber or Snapchat, that consistently raise billions of dollars? If they needed that much funding, certainly Protocol Labs might need that amount as well, right? If they were more mature, yes, but today that’s not true. Generally speaking, when firms do raise $100 million dollars, it’s not necessary for the activities to get to market. Instead, it’s for the activities necessary to scaling an organization.

Andrew Chen wrote a great article about why Startups are getting cheaper to launch but more expensive to scale. He argues that it doesn’t take much money today to build a software product and launch to market. But because of the challenges in acquiring a large customer base, later and later funcding rounds are getting more expensive. Filecoin, as ambitious of a project as it is, simply isn’t there yet.

Funding Argument #2: Filecoin Can Only Be Funded Through One Round, So It Needs To Be Big

Another argument that was made:

Normally, startup companies have many rounds, at different prices, stretched out over time. In token sales, it is usual to have a single up-front fundraising event instead, with the requirement that the team better be able to finish everything they intend to do and launch a fully functioning network. Follow-on fundraising is not solidly figured out yet. Therefore, teams raise more to be safe, and this increasing pricing function helps us make sure we’re selling it more fairly, instead of selling it all at the lowest price regardless of what people think it’s worth.

We can boil this argument down to one statement: Protocols Labs only have one opportunity to raise funds for Filecoin, so they should raise all the money they will ever need now. Token sales (to date) only happen only once and once the tokens are gone, that’s it.

There’s two big gap in this logic: The first is that token raisers have already built in a safety measure to be able to raise more funds later. ICOs disperse most of their tokens to early investors during the fund raising event. However, it is standard practice to leave part of the tokens to the organizing team. Filecoin is no different. From FileCoin’s token sale page:

20% of the tokens generated from the FileCoin ICO are being retained by Protocol Labs (for profit company) and the Filecoin Foundation (non-profit organization). The reason for this is for the exact reason listed above: if the company needs to raise more funds in the future, they can sell their tokens. It’s not hard to imagine a way that they could sell 1-2% of their tokens at a separate event to raise funds for their next project or set of milestones.

However, this ignores the biggest flaw in FileCoin’s argument: Token Sales are not the only way to raise fund, but just one new way to do so. Raising VC through an equity sale is a 100% a viable option for this organization in the future. Protocol Labs has already raised $3 million using this method, so they are fully aware of how the process works.

An Alternative Theory to Why Filecoin is Raising >$100 Million

I want to focus more on that last point, because I think it’s the crux to why FileCoin and other decentralized application developers are opting to create >$100 million ICO events. I don’t think greed is a sufficient answer, as this team has clearly been dedicated to the industry for many years, built a solid community and wants to build even more. But >$100 million is overkill, especially since traditional funding for such a product would be available if they can show traction. So why do it if not greed?

I believe the answer lies in the risk in raising venture capital, risks that disappear entirely during a token sale.

Raising investment capital is a very nasty business that requires a lot of work for not much success. Most founders are out of control of their destiny, largely because they need the money to survive and have to bend to the whim of those that fund them. For every 1 Facebook, there’s a 100 failed startups that struggled for every cent. This is a risk that every founder takes when giving up equity and raising VC funding.

And then the ICO appeared. Protocol Labs was fortunate to be specifically positioned to raise money in a time when ICO funding was hitting it’s zenith. Your company gets to create a new asset that is specifically not tied to the equity of your organization and raise hundreds of millions of dollars. You give up no control, are not accountable to your investors and can still sell your equity if you do find you need the money. It is as forgiving as Venture Capital is ruthless. And for decentralized protocol founders, it’s a godsend.

The New Screw You Money

Screw You Money is general discussed from the perspective of the individual. If someone writes me a check for $20 million, I have the right to say screw you to whomever I want and do whatever projects I desire. ICO funding is Screw You Money for a whole organization. If you raise >$100 million, you can say ‘fscrew you’ to any and all investors, saving your equity and not giving up control.

This ICO is about giving Protocol Labs the funding and the ability to do whatever project they feel is in the best interest of their community and organization. From everything I’ve read, this is a good team with a strong vision. This money will give them the ability to control their company and lead a vision as they see fit, without interference.

There’s one major drawback here: extreme levels of funding in undelivered products create weak organizations and even weaker industries. Venture Capital is designed to get teams to work towards a goal and either produce a result or get out of a market. We want companies exposed to the harsh reality of the market because this method creates better products. Over funding creates companies similar to what existed during the dot com bubble, where products do not have to deliver and, as a result, do not get get delivered. This creates great crashes that take a long time to recover from.

Conclusion

Understand that raising Venture Capital is a bad experience that often ends in entrepreneurs losing everything they’ve worked towards. But also understand that flipping power in the opposite direction, to giving ultimate power to the company and none to the investors, is just as perverse. It creates no incentive for the organization to create a real product, putting the investors and the industry in serious risk.

Filecoin will raise a lot of money today and maybe, hopefully, create something good. But it’s only a matter of time before some more egregious comes out of this madness. I would love to see Protocol Labs reconsider, take the $52 million they’ve raised so far and produce a great product.

Over the last few weeks, I have continued to review the top cryptocurrencies by market capitalization, looking for new blockchains to analyze. Our criteria was simple:

The cryptocurrency needed to be an infrastructure token (aka a native asset used to pay and incentivize miners to contribute server power)

The blockchain must have been on mainnet since July 31, 2016 (12 months since the beginning of the project)

The value of the cryptocurrency must have sustained a value about $10 million since January 31st, 2017 (six months since the beginning of the project)

During our initial analysis, we analyzed 55 blockchains and found that 16 fit our criteria and would be studied further. Since then, we have analyzed 25 more blockchains and have yet to add any additional blockchains to the analysis.

For the most part, we are finding assets that qualify as infrastructure tokens and have been on mainnet long enough. The problem is that none of these tokens were able to maintain a valuation of over $10 million until very recently. Most of these tokens were valued somewhere between $2 million and $5 million for most of their history. It was only because of the bull market starting in April that many tokens were able to breach $10 million.

This bring up a couple of questions for our team to consider as we wrap up this phase:

Is market cap as good of an indicator as we would like it to be to limit our pool of cryptocurrencies? The purpose of using market cap as a metric was to meaningfully eliminate under-utilized tokens which may no longer be actively developed or utilized. This is generally true, but there are tokens like Peercoin that has existed since 2012 that did not make the cut.

If we conducted this evaluation six months ago, would $10 million be the correct choice to meaningfully cutoff cryptocurrencies?

Would adding in factors like average daily trading volume help strengthen the analysis? What about analysis of transaction amounts per block generate?

Regardless, we think we’re narrowing in on what cryptocurrencies really matter to this industry and how to evaluate them. You can see our latest research here if you’d like to see the specifics on what we’ve done so far. If you have any suggestions or thought, leave a comment below.

If you spend any time in the cryptocurrency world (more now that the market has risen so dramatically), you’re undoubtedly going to run into some pretty unbelievable claims. There are people running around talking about how they made a 1000% return in a couple of months and how Ripple or Dash made them overnight millionaires.

Because of these claims, you may begin to believe that there are ways to make money quick in this area and, if you’re lucky, that’s true. But as the market grew, many scammers began to move into the space and start making incredible claims. If you’re unseasoned, you may believe that these claims, while incredible, are just as true as the 1000% investment return.

In this series, we will identify common cryptocurrency scams, how people fall for them them and how to identify them easily. Today, we will be taking a closer look at Pump and Dump cryptocurrencies.

What is a Pump and Dump Scam?

A pump and dump scam is a particular type of market manipulation scheme to quickly raise the price of a currency and sell during the peak of the hype. For very large cryptocurrencies like Ethereum or Bitcoin, it’s nearly impossible for one user to manipulate the market. However, there are hundreds of actively traded cryptocurrencies with valuations of under $5 million. In these cases, it’s easier for people to get a significant amount of the currency to start manipulating the market.

How Do Pump and Dump Scams Work?

The Setup

Like all good market manipulations, there needs to be a group of insiders orchestrating the event and purposely misleading people to buy while they sell. One very common way to create a group of insiders is to create a ‘Pump and Dump Group’.

Pump and Dump groups are any semi-private channel (such as Slack or Telegram) that allow a group of users to plan away from the public eye. You can occasionally see them promoting their groups on more public channels like Reddit, but generally the insiders don’t promote until later. While together, one ring leader (or leaders) will pick a cryptocurrency as their mark and quietly buy up a large amount of the cryptocurrency while the price is low.

The Pitch

Once the insiders have their share, then they get loud. Incredibly loud.

They’ll start promoting the currency by saying the technology has true potential, that they have some special feature no other cryptocurrency has and, boom, the price is rising! Users outside of the inner circle will begin to take notice and purchase the cryptocurrency. Because the price starts so low, it does not take a ton of activity to cause the price to jump up quickly.

The valuation of these cryptocurrencies will go from $5 million to $50 million in a few days, causing the market to temporarily go ballistic. Many other users will start promoting the cryptocurrency themselves on their blogs and social channels, bringing even more credibility to the sudden rise in value.

The Payoff

It’s around this time that the insiders (and again, there always need to be insiders) start to quietly sell off while ferociously telling everyone else to sell. After the insider group made their 10X return, they often quietly fade away while the market continues to buy.

Then, just as quickly as the price jumps, it falls. Many users who bought at the peak (called bag holders) will often be left holding a cryptocurrency with declining value. These buyers are are the true targets of these pump and dumps, the users who will pay 10x to the insiders for a cryptocurrency that is actually worthless. And once the price rises and falls, will almost never return in value.

How Can You Spot a Pump and Dump?

The reason many users fall for pump and dump scams is because making a massive 4000% return is not unheard of in this space. Ethereum, from January to June, made exactly that level of return. However, there are some key difference you can spot before you invest in something worthless.

Long Periods of Inactivity Followed By A Sudden Spike

It’s not uncommon for a cryptocurrency to get a huge spike in price, dwarfing whatever market existed for the cryptocurrency before. However, pump and dump cryptocurrencies are almost dead (very little trading) for an extended period of time before getting a huge spike in price.

As an example, here is a graph of Ethereum in the months leading up to it’s sudden price increase:

Even though the spike that is about to come dwarfs the activity seen here, there is a fairly active market, with natural highs and lows.

Compare this to ChainCoin, a known pump and dump cryptocurrency in it’s months leading to it’s sudden rise in price:

There’s almost no activity to speak of before the July 8th price increase. Ethereum had an active market that grew in size, whereas the ChainCoin has almost no market, then a sudden burst of activity.

This is one of the telltale signs of a pump and dump cryptocurrency.

Very Little Social Presence Outside of One or Two Channels

It’s hard to find good cryptocurrency resources if you’re new to the industry. However, after some digging it’s likely that you’ll find many communities spread across channels like Reddit, Telegram, Slack and even IRC. Even smaller cryptocurrencies like Nexus (a blockchain you’ve likely never heard of) has thousands of users on Slack, Reddit and Twitter.

This will not be the case for Pump and Dump cryptocurrencies. The insiders will usually have one channel (telegram group, slack channel, youtube channel) and users on other people’s channels talking about the cryptocurrency. Because the group is so new, there won’t be time to grow a presence among a larger number of channels. So while there may be a lot of activity among this one group, the information among other channels will be minimal to nil.

If you’re discovering that you can’t find information about your cryptocurrency in other social channels, that’s a sign that the group hasn’t existed for very long.

Immediate and Ferocious Condemnation For Questioning The Cryptocurrency

Cryptocurrency users are not known for their humility, but even in communities like the Ethereum subreddit and the Bitcoin Forums, there is a healthy amount of debate and arguments. However, Pump and Dump groups rely on hype from their users, so even one dissenting opinion can derail the train. In these cases, insiders will attack dissenters, calling them whatever names they can to get them to leave.

If the popular users of a pump and dump group cannot have an honest discussion about what their investing in, that’s usually a bad sign.

Conclusion and Resources

I’ll end each of these posts with the same statement: the root of people investors falling for scams is the Fear of Missing Out. Nefarious users prey on people’s belief that they are going to miss the boat to riches and this is their one opportunity to make a fortune. If you are calm, tempered and willing to wait, these scams will have no power over you.